Mumbai, Dec 05: Banks should build their investment fluctuation reserves (IFR) quickly so that they are in a better position to tackle interest rate volatility, the Reserve Bank of India said in a circular posted on its Website late on Thursday.
Banks invested heavily in government bonds in this period, reaping handsome profits.
It had advised banks in April, in its annual monetary policy, to build a reserve of at least five percent of their investments in federal and other quasi-government bonds in the "held for trading" and "available for sale" categories in five years.
"Although banks have up to March 2006 to achieve the stipulated five percent, they are urged to quickly build up IFR to be better positioned to meet interest rate risks," it said on its Web site www.rbi.org.in.
As the risk perceptions of banks could differ, they are encouraged to build a reserve of up to 10 percent, it added.
Bond yields hit life lows in October after a three-year rally, during which the central bank cut official interest rates sharply to three-decade lows amid an economic slowdown.
But there are signs that the central bank could shift to a neutral rate stance amid a strong rebound in the Indian and global economies.
Banks' holdings of government and other approved securities now far exceed the statutory liquidity ratio of 25 percent of their total deposits, according to the central bank.
The excess holdings are worth more than 2.5 trillion rupees and constitute about 17 percent of banks' net demand and time liabilities.
Bureau Report